Today’s webcast conference call will be simultaneously streamed through the Internet of SMIC’s website. (Operator Instructions) The earnings press release is available for download at www.smics.com. Webcast playback will also be available approximately 1 hour after the event.

Without further ado, I would like to introduce to you Mr. Tim Kuo, Director and Head of Investor Relations, for the cautionary statement.

Good morning, and good evening. Welcome to SMIC’s First Quarter 2020 Earnings Webcast Conference Call. Today, our CFO, Dr. Gao, will highlight our financial performance and give guidance for the next quarter. And then our Co-CEO, Dr. Zhao, will provide some business commentary. This will be followed by our Q&A session hosted by Dr. Zhao, Dr. Liang and Dr. Gao.

As usual, our call will be approximately 60 minutes in length. The earnings press release and financial presentation are available for you to download at www.smics.com under Investor Relations in the IR Calendar section.

Let me also remind you that the presentation we’ll be making today includes forward-looking statements. These statements and other comments are not guarantees of future performance, but represent the company’s estimates and are subject to risk and uncertainty. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings and submissions with the Hong Kong Stock Exchange Limited.

During the call, we will make reference to financial measures that do not conform to international financial reporting standards, IFRS. These measures may be calculated differently than similar non-IFRS data presented by other companies. Please refer to the tables in our press release for a reconciliation of IFRS to the non-IFRS numbers we will be discussing.

Please note that all currency figures are in U.S. dollars, unless otherwise stated.

I will now hand the call to our CFO, Dr. Gao, for financial highlights.

Thank you, Tim. Greetings to all our listeners. First, I will highlight our first quarter results and give second quarter 2020 guidance.

In the first quarter 2020, our revenue was $905 million, an increase of 8% quarter-over-quarter and 35% year-over-year, higher than our original guided range, mainly due to the increase in wafer shipment. Gross margin was 26%, a sequential increase mainly due to the better product mix in the first quarter. Non-GAAP operating expenses were $239 million, lower than guided range, mainly because of control of R&D and G&A expenses in the first quarter. Profit for the period attributable to SMIC was $64 million, while noncontrolling interest was $13 million of credit to SMIC’s attributable profit in the first quarter.

Moving to the balance sheet. At the end of the first quarter, cash on hand, including financial assets, excluding restricted cash, were close to $5.3 billion. Gross debt to equity was 48%, and net debt to equity was negative 3%.

In terms of cash flow, we generated $260 million of cash from operating activities in the first quarter.

Now looking ahead into the second quarter of 2020. Our revenue is guided to be up 3% to 5% quarter-over-quarter. Gross margin is expected to range from 26% to 28%. Non-GAAP operating expenses are expected to range from $240 million to $245 million. Noncontrolling interest of our majority-owned subsidiaries are expected to range from $0 to positive $10 million, which are losses be borne by noncontrolling interests.

The planned 2020 CapEx is raised from $30.2 billion (sic) [$3.2 billion] to $4.3 billion. The incremental CapEx is for mature technology product lines and the equipment and the facility in our majority-owned Shanghai 12 inch fab. Our planned 2020 D&A is still $1.4 billion. Our 2020 gross margin is expected to be higher than [2019] (corrected by the company after the call) which was 20.6%.

Earlier this month, we announced a proposed issue of RMB shares on the Sci-tech Board (sic) [Science and Technology Board] of SSE. The initial number of shares will not exceed 25% of total shares, including the new issuance. We plan to use the process of our FinFET project, advanced and majority technology R&D and working capital. In the meantime, the proposed share issue is subject to shareholder and regulatory approvals.

I will now hand the call over to our Co-CEO, Hai Jun, for general remarks.

Thank you, Yonggang. Thank you all for joining us today. I hope all of you are healthy and safe.

Today, I will give the overall business commentary first, then Mong Song, Yonggang and I will answer the questions from the line.

Several months have passed since the beginning of COVID-19 outbreak, and we continue to monitor the situation closely and carefully. At present, there have been 0 cases of infection at SMIC. The company took quick measures to safeguard the health and safety of our employees. Safety is always our priority to put the health and safety of our employees first. Currently, we continue to monitor all the employees in-house by keeping strict protocols such as required temperature checks and face mask whenever entering the company, self-declaration — of keep track of employees whereabouts and keeping social distance. In addition, we suspended all the business travels and restricted visitors on site. Although certain customers are seeing dampened consumer demand from emerging markets as a result of the virus, our fabs [remains full] as we’re seeing strong orders from our customers as a result of diversified technology offerings and versatile capacity conversions. In fact, overall orders in this first half have been stronger than initially anticipated. In the meantime, demand is still good, and our fab continue to operate near fully loaded. Logistically, some deliveries were slower [than usual] (corrected by the company after the call) due to the virus. However, the impact is not material. Our upside adjusted capacity expansion is still continuing as planned for this year.

In February, SMIC made a donation to support prevention and control of the coronavirus and the protection of medical personnels. We are happy to see that things have been much improved in Hubei and all over China. We’re also thankful that we are getting through the situation with resilience, but at the same time, our hearts and thoughts are with those around the world who are still affected by this pandemic.

Let me continue my remarks by highlighting the results of the first quarter, and then I will update you on our mature node technology and advanced technology platforms and business, capacity plans and future outlook.

I’m pleased to say that our first quarter 2020 revenue has reached a historic high of USD 905 million. Our revenue increased 8% sequentially and 35% year-over-year compared to first quarter last year, significantly beating the original guidance, which was guided to be flat to up 2% only. While gross margin previously guided to be 21% to 23% actually hit 26%, also higher than our initial guidance as a result of better-than-expected demand and better product mix.

Earlier this year, we have held a more cautious and conservative view due to the uncertainties around the health situation. However, orders remained strong throughout the quarter without interruptions. At the same time, through process optimization and improved efficiency, wafer shipment increased in first quarter to meet high demand.

Growth came across the board from various customers, nodes and applications. Reported gross margin was 26% in first quarter compared to 24% in fourth quarter last year and 18% in first quarter last year as we maintained a close to full utilization with better product mix. Overall wafer shipment in the first quarter increased 5% quarter-over-quarter and 29% year-over-year. By application, our communications sector is up by 19% quarter-over-quarter and 54% year-over-year. Computer and consumer sectors also grew 34% and 47% year-over-year, respectively.

From a regional perspective, business continued to be strong in the China region, which increased 2% quarter-over-quarter and 55% year-over-year, contributing to [62%] (corrected by the company after the call) of our revenue. North America region is up 24% quarter-over-quarter and 7% year-over-year. Revenue from our Eurasia customers is up 9% quarter-over-quarter and 27% year-over-year. Our goal is to healthily balance overseas and domestic revenues as we maintain our strategy to be an international company, developing global markets and customers.

Now to address our mature nodes product application platforms and business. We continue to see strong momentum in our CMOS image sensor, image sensor processor, BCD analog power, RF-IoTs and specialty memory platforms. Our wafer revenue from CIS, BCD power analog, fingerprint, specialty memory ICs are up 15% quarter-over-quarter and 40% year-over-year during the first quarter of 2020. In these segmentation markets, the overall demand is increasing every year. To highlight specifically, our RF IoT platform demand is mounting as we have expanded into optical solutions for fingerprint sectors. Meanwhile, CMOS image sensors, including image sensor processors, continue to be strong with applications in automotive accessories, surveillance and mobile phones. Notable growth in first quarter came from 65 and 55 nodes and 28-nanometer nodes under their respective application platforms. 65- and 55-nanometer is up 13% quarter-over-quarter and 96% year-over-year. These increases are largely due to logic specialty NOR Flash and NAND Flash and CMOS image sensor application platforms such as TWS for wearables. We are proud to say that our customers are using our specialty flash capabilities to manufacture components successfully penetrating international top-tier smartphone accessories supply chains. 28-nanometer is up 40% quarter-over-quarter due to an increase in phone-related output. We also see some increased 28-nanometer demands this year as we began to ramp up more consumer-related applications. And we will moderately expand in order to reasonably meet these needs of strategic customers.

As we continue on with our mature technology R&D and close partnership with our customers, our mature technology platform will continue to cover advanced and diversified portfolios of communications and consumer end devices, which include a wide range of smartphone-related ICs.

Now moving on to our advanced technology platform and business. As we mentioned previously, our 14-nanometer entered production last year as we continue to ramp up new capacity throughout this year. We are progressing well with first quarter 14-nanometer wafer revenue surpassing 1% contribution as quality continue to climb and customer gave positive feedback. Our 14-nanometer FinFET technology continue to benchmark against industrial standard. We are pleased to see increased penetration and content share gains in various applications through collaborative efforts in enriching our advanced and overall technology portfolios. Our 14-nanometer covers a range of multiple application platforms in communications and automotive sectors, such as mobile phones, smartphones and auto-related accessories. We are ramping gradually at a good cautious pace, balancing customer demand and capital spending.

Meanwhile, we continue with NTO projects with both domestic and global customers. The first wave of FinFET applications include mid- to low-end application processors, baseband and consumer-related applications. Furthermore, we also have auto-related NTO and extended our portfolio to RF connectivity products. Our 12-nanometer process technology is an extension of our 14-nanometer, and we are pleased to have already begun our pilot production. 12-nanometer have been progressing well and is on track with NTOs.

To address our progress on R&D, we are currently in the customer product verification at a qualification stage with next-generation FinFET. We continue to engage with domestic and global customers. We are happy to see our customers utilizing our full array of services, which include design services, mask-making, fabrication and the middle and back-end manufacturing with our partners.

Now to look at our 2020 capital expenditures. We are adding USD 1.1 billion to our CapEx, increasing the total to USD 4.3 billion, mostly for ramping up our FinFET lines, also for the expanding of our mature technology lines, which are running at full capacity. We continue to see healthy demand from our customers. Thus, we are expanding our 8-inch and 12-inch lines to debottleneck our current capacity tightening and to fill in the gaps between our supply and customer demand. We will add on 30,000 wafers per month of 8-inch capacity in our Tianjin, Shanghai and Shenzhen fabs and also add on 20,000 wafer per month capacity of 12-inch in our Beijing fabs, whereas our FinFET will continue to cautiously ramp up with our customer demand as we expand prudently.

Now to give insight on our outlook. Q2 is expected to be up 3% to 5% in revenue. It will be another strong quarter. Business continued to be stable and strong. Customers continue to place orders and are not seeing much slowdown yet. At the same time, we continue to accelerate the commercialization of our advanced technology business as we anticipate our 14-nanometer revenue contribution to continue to grow. Nonetheless, we continue to monitor the COVID-19 situation and the impacts that may result from end markets and the supply chain as we aim to minimize or eliminate the possible impacts. Compared to 3 months ago, we have increased assurance in our growth and business. Given our current outlook and growth confidence, we raise and clarify our annual revenue growth targets to mid to high teens growth. We also aim to increase our gross margin targets, which will be higher than 2020 — 2019. We continue to take our top line growth seriously and continue overall improvement in product mix and growth momentum. Our customers are displaying healthy inventory levels. And thus, we continue to feel strongly about 2020.

Visibility remains limited with regards to the second half of this year. However, we remain cautiously optimistic as current customer feedback will still support a healthy year of growth for SMIC.

As many of you know, SMIC has taken initial stack in exploring financing opportunities in the Chinese equity market. We see this as a good opportunity to take advantage of new sources for funding our growth. We believe this is good avenue to expand SMIC’s option for sourcing capital for the future expansion of leading-edge technologies, debottlenecking of mature capacity, supporting R&D and funding our growth-driven pursuits. This also present us with opportunities channel to connect with domestic industry and the local markets in order to expand our customers and support growth.

Our Board has approved the issuance of renminbi shares, which will be listed on the SSE Sci-Tech innovation board (sic) [Science and Technology Board]. We are now considering the market conditions and awaiting shareholder and regulatory approvals, and we will continue to issue updates as the project progress.

To conclude, overall demand for semiconductor ICs continue to be strong in the first half of this year. Although the market situation is clouded by the uncertainty in the second half, SMIC is seeing fairly strong year of growth. SMIC has invested efforts and capital to refine its strategy, solidify its offerings and accelerate strategies and technologies. We have expanded our technology platforms to make sure we can deliver increased diversity on the solutions to our customers. And now SMIC is entering a period of growth as customer take advantage of our expanded capabilities and the new technologies.

We thank you for continued support, and thank you for joining us today. I will now hand the call back to Tim for the Q&A session of this call.

Thank you, Dr. Zhao. Today’s Q&A will be hosted by our Co-CEOs, Dr. Zhao, Dr. Liang; and our CFO, Dr. Gao. I would now like to open up the call for Q&A. (Operator Instructions) Operator, please assist.

Our first question comes from the line of Randy Abrams from Crédit Suisse.

——————————————————————————–

Randy Abrams, Crédit Suisse AG, Research Division – MD and Head of Taiwan Research in the Equity Research Department [2]

——————————————————————————–

Yes. Good job on the results and managing through some of the COVID-19 impacts. I wanted to ask the first question on the CapEx versus the capacity plans. It looks like the fab plans are similar to what you outlined last quarter, the FinFET ramp, 15K, 30K, 8-inch and 20K of 12-inch. So could you talk about, for that increase of capacity or CapEx with the change in the plan, so where the CapEx? Or if it’s a timing that you’re pulling in some of those fab ramp-ups?

Randy, thank you for the questions. And overall, the situation for the technology deliverables platform setting up customer demand, and we see very positive feedback from our customers. And both the advanced technologies like FinFET, 40-nanometer to 12-nanometer and the 28-nanometer, all the way to aluminum in 0.18 micron technologies, we are in very short supply. The gap is big. And we continue our expansion plan for this type of capacity expansion, and we maintain the commitment to our customers. And the incremental capital this time from USD 3.1 billion to USD 4.3 billion, that’s USD 1.1 billion, will be used to fulfill this gap in both the FinFET technologies and 28 and below all the way to 0.18 micron aluminum technologies.

——————————————————————————–

Randy Abrams, Crédit Suisse AG, Research Division – MD and Head of Taiwan Research in the Equity Research Department [4]

——————————————————————————–

Okay. If I could ask on the advanced nodes for 14 where you’ll be adding a good amount of capacity, if you could give how that may apply to the revenue ramp-up. Like, what percent of revenue where it’s been about 1% now, but how you see it ramping toward 10% of revenue? And how concentrated is the customer base? Just if you sort of move ahead with restrictions on one of your top customers, if you can use that capacity for other application for customers.

And on the other U.S. restriction, if you could just talk if you have any impact from some of the license requirements. It seems kind of vague and broad, but on military use, if any impact on your ability to secure tools?

Randy, actually, too many questions. We got 2 — to minimize it to 2. One is a 14-nanometer contribution and Mong Song will give you the answer.

Another question is the potential impact from the restrictions of U.S. government on the machines that they sell to SMIC.

I’ll answer the second question first. SMIC is international company. We have been and to have the communications with the supplier side on American Department of Commerce pretty well in the past 20 years. And we follow the rules for the compliance and so far, perfectly. And we have the commitment for the nonmilitary use from day 1, 20 years back. So now we are in the same situation. We have the full commitment. We have the full compliance. And at this moment, we do not see a big change in policy or way of doing things. I will now give back to Mong Song for his comments on contribution of the advanced technologies.

Randy, this is Mong Song. I just try to address your question related to the FinFET. As you probably know, we are in a very careful ramping stage in capacity of the FinFET because that really depends on the customer demand and the tools we can move in, okay, in the right timing. So you ask when can we reach 10%? Of course, 10% is for SMIC’s FinFET is a big number, so — that I don’t see it until sometime next year, okay? This year, it will be still at a low single-digit portion to the overall revenue.

——————————————————————————–

Randy Abrams, Crédit Suisse AG, Research Division – MD and Head of Taiwan Research in the Equity Research Department [7]

——————————————————————————–

Okay. If I can follow-up, though, do you still have the plan to have 15,000 wafer capacity? Like, would we have a period of some underutilization as you bring up those applications? And then I can get back in the queue.

That is also very critical questions, okay? By end of the year, we’re going to ramp up to the 15,000 per month capacity. That mean is the fab in wafer, okay? It’s not building wafer. It’s not prefab, okay? So that is one clarification. And since we have to build in the big capacity in order to fully utilize the fab. So for example, we build 15,000 capacity, but we won — we probably were not able to ship the 15,000 per month just because of the operational efficiency. So we have to have a certain reservoir for the efficiency improvement.

——————————————————————————–

Operator [9]

——————————————————————————–

Our next question comes from the line of JunJie Chen from Tianfeng Securities.

JunJie, thank you for the questions. Our customers, so fluctuations on these kind of things. You know the COVID-19 also impact some developing countries. So the customer who is sending the components to these kind of development countries, they see some slowdown of the demand for mobile phones and smart homes and IoTs. But overall, for SMIC’s loading, this has no impact at all. We have been in shortage, there’s a very big shortage for capacity demand and on diversified platforms. And this is one of the things I give the comments. The second, there are two other factors that still support the market. One is the worry on the supply chain. Even though the customer ordered a lot of wafers, but overall, logistics in the supply chain getting slower, so the building up is slow. So enhanced inventory is still at a very low level. They have to make sure for the very tight bottleneck in the supply chain can deliver the parts they need. For example, labor-intensive in developing countries, this kind of industry manufacturing capacity has not fully recovered yet. So the customers still worry a lot on the stability of the supply chains that are worrying oversupply.

And the second thing is for the 5G smart home and IoT demand stays here is much higher than last year. And for the fourth quarter, including April, for the first 4 months, the mobile phone made in China actually have 75% of 5G chips inside. And for the 5G mobile phones, they not necessarily just demands for the CPU, APUs at 7-nanometer, 6-nanometer, 5-nanometer. They also have much larger demand on the RF chips and much larger numbers of PMU. Give you the examples. Minimum need 6 PMUs or PMIC ICs inside a mobile phone. So the demand for 0.15 to 0.25 aluminum got — almost doubled for the 5G mobile phone demand. And you also need — you know the cameras, and from 2 cameras to 4 to 6. And each camera, CIS, they get a larger density from original 8 megapixel to 15 meg. Currently, standard settings is 40 million pixel to 50 million pixel. My point to say, even though the mobile phone set number, the handset number quantity decreased possibly 15% in the fourth quarter, but the total silicon usage is higher than before. If the capacity in the whole world is the same, then they will see every foundry fab in the shortage to the supplies.

Yes. As I’ve mentioned to — answer to the — Randy previously, the number I quote is wafer start not wafer out, okay? And the other is when we call that wafer start number, we have to build more than that number in order to have a full utilization of the fab efficiency, okay?

And your second question is the cycle time, okay. And the cycle time actually depends on the scale of the fab. So at this moment, we only have a few k per month fab in capacity. Actually, our cycle time definitely cannot compare with the industry standard. But as our capacity gradually building up towards the second half and our targets, our cycle time by Q4 will reach to the industry standard numbers.

Bill, basically, our plan is to spend 50-50 first and second half. But the — because of the pandemic COVID-19 and the logistic got slow down. So the plan possibly like V shape on 1 month to 2 months’ delay. But overall plan is 50-50.

Okay. The reason I ask that is you’re guiding for mid- to high double-digit — teens growth for this year. And I think in the first half, given that first half of last year was off to a slightly weaker start, that seems very doable. But if you look at the second half, second half of last year was already pretty good. So for you to continue growing at that pace, you will have to have some new capacity ramped up. Am I reading that right? Or is there maybe an ASP angle or something that I’m not paying attention to?

Okay, Bill. Actually, before this conference, we also collect all the numbers. We should say the first quarter type of growth, we do not use too much of the capacity expansion. And for the second half growth, we can make full use of the expansion capacity. But last time, during the last conference, we already mentioned that because the slowdown of the shipments and overall capacity can only show up in the fourth quarter this year, the last quarter this year. So basically, we could not fully benefit from the expansion. But overall, still very good performance.

I guess I’m just wondering how you get that growth in the second half, right, because I think you’re running pretty full already. And I expect that the new capacity is going to be not until end of the year. So how do you get that growth in the second half of the year? Is it ASP? Or is it something different?

You are doing the mathematics. Okay. The first quarter compared with last year, we grow by 35%. And this is the first quarter. Second quarter, we already gave the forecast, and also much higher than last year. So the first half of this year, and we already beat the forecast of high-teens percentage compared with the first half last year. And we need to make sure that the second half this year compared with the second half last year, we can grow high teens percentage. And based on the capacity build-out and the wafer order customer demands, and we believe that can be true. The incremental, you can add it on. Compared with last year’s second half, we have the FinFET contribution, and we also have additional 30,000 wafer per month 8-inch. We also have the — and the 12-inch additional 20,000 wafer per month. And our efficiency, in general, we can improve 5% in our mature wafer fab, mainly by product mix adjustments and the debottlenecking.

I’ll give you one of the examples. And previously, we have a lot of — for example, we have a lot of 31 layers logic on 0.18 micron. But the product actually range from — for photo layers layers, from 22 layers, all the way to MCU, can be [40] layers. And if our bottleneck is the photo layers, we can relay under the situation of over demand, we can really adjust the product mix and debottlenecking the bottleneck actually ship out more wafers from our mature fab. Even though the are original setting is 100, we can ship out 105.

N-plus-1 node, right now, we finished the customer product verification, okay, and we are waiting for the customer do qualification and wait for the market recover. And we’re ready to ramp up that technology.

Customer engagement. Right now, we are target — I think last time I explained to person about this N-plus-1 definition. N-plus-1, we target for the low cost and customization technology, okay? So this is not a general purpose technology, okay? So we will target for those product they don’t want to migrate to the N-plus-2 across the technology. So that one is really limited to a specific application and specific customer. And for that technology, we probably will not build a comprehensive IP portfolio. We will wait for the next node. So those customers application is limited and customization customer is also limited. So that’s why we’re waiting for the customer signal for ramping up of order.

——————————————————————————–

Operator [27]

——————————————————————————–

Our next question comes from the line of Szeho Ng from China Renaissance.

That’s a very good question, okay? Of course, we keep the 14 or 12, then we will not get much profitability. So we will depends on — we will build certain capacity for the N, and we will migrate to the N-plus-1 and N-plus-2 to search for higher profitability, yes.

Yes, that’s good. Yes. Dr. Liang, actually, I think a year ago, you mentioned that there are 3 phases of ramping up the FinFET technology. When we get to Phase 2, we should achieve the ASP similar to the cost. When should we expect that to be achieved?

Okay. That’s also a very critical question. I’ve been thinking this all the time, okay? What is the breakeven point? That really depends on the web scale, as you know, and shipment volume, ASP and our product year and our manufacturing costs, our OpEx and so on, okay?

So in general, we believe the 15,000 shipment and with 20,000 capacity is a minimum criteria for cash breakeven. And that we are working on that.

(foreign language) The first one is visibility for second half and also for second quarter. What would be the stronger application and technology node compared to the average? That’s my first question.

Andrew, for SMIC, currently, we see two things. One thing is the market changed because of the 5G smartphone, smart home and wearable IoTs. The markets of that kind of applications are getting larger. They grow very fast. The second thing we see is that our customers are getting larger. They get more market shares. So the growth of the segmentation of the market is one thing. The growth of our customer, their own market share, is another thing. So combine these 2 factors and SMIC, we started to see very big gap of demand and supply. And the very, very tight area, at this moment, we see one is the 14-nanometer. All the 5G mobile phones, they demand for RF-type of applications in 14-nanometer. Some time back, we believe 28-nanometer, 22-nanometer also in a short supply because the millimeter wave 5G will demand the RF on 22-, 28-nanometer inside of FinFET because the degradations of RF for performance in FinFET. But now since majority of 5G mobile phones are running in sub-50, so all the demands are focused on 14-nanometer, 12-nanometer FinFET technologies. So that’s one of the areas in a very big shortage. Besides, everybody knows the 5-nanometer type of shortage; second shortage, 14-nanometer; and we see a very, very big shortage in aluminum 0.15 to 0.18 micron area because the PMUs original mobile phone for 3G, 4G, possibly 2 to 3 PMU chips. But now for 5G, for the American designer designed mobile phone 5G, they need 8 or more than 8 chips for PMU and the controllers. For the local Chinese designer, they need more than 6 ICs for power management. So for that area, get very big demand.

You also know for the mobile phones that they need this under-glass fingerprint, they need a quick charger, they need larger, more cameras. So together, the silicon and the cameras mainly focused on 55-nanometer, 40-nanometer. And the fingerprint also squeeze in into 0.15 to 0.18 aluminum. And let alone to say the camera module for 5G and smartphones these days, they pipe together with the 40 million to 50 million pixel with another 2 8 million pixel, down another [2 2 million pixel.]There are actually 6 CMOS major chips inside. So basically, right away, we see the shortage on 0.18 micron aluminum technology and wafer fabs, and we see very big shortage in 55-, 65-nanometer wafer fabs and also 40-nanometer fabs. 28-nanometer still very loose capacity and [no big demand]. But 40-nanometer, 55-nanometer — and 55-, 65-nanometer also and collated with another demand, that’s the NOR Flash and high-quality specialty NAND Flash. Because the 2 stereo chips we connect TWS. They have very big demand because the high-quality music need minimum 128 megabit for each ear and this TWS. For the top tiers, need 256 megabit. Originally, sometime back, 1 year, 2 years back, and they only need 2 megabit, 4 megabit NOR Flash. But now the density, even for single chip, already transit from 2 meg, 4 meg, to all the way to 128, 256. So the silicon demand, the area demand, even though the (inaudible) is still the same quality possibly, but silicon demand already 10x increased. So the area that I shared with you. We also have the others like high-voltage drivers and the processors. And smart home is another area, very big, and this is expansion. So the processors, the connectivity, the Wi-Fi, the Bluetooth, mostly all in one, that mean Bluetooth, Wi-Fi, communications and processors all in one. So we see the 40-nanometer get a very big boom. And definitely, without 40-nanometer capacity, these kind of application will move down to 28-and 22-nanometer. So for SMIC, we are in a shortage, not just in 55-, 0.18 and the 40-nanometer, we also started to see 28-nanometer demand for smart homes.

And the consumer, same as a smart home, like your TV, that’s a meter TV, they also have the connectivity. And they also have the — this kind of auto communication and synchronization type of functions.

My second question is for Gao Yonggang. Why the operating expenses guidance has been revised, non-IFRS one, has been revised down from the first quarter? I remember first quarter guided 2-point — $294 million to $300 million. But this quarter, come down to $240 million to $245 million. Is this structure coming down going for the rest of the year or just one-off?

Let me translate on the question regarding Andrew’s question on the OpEx. So he — so we see that the first quarter OpEx is actually down from original guidance. It’s because the management is really focused on controlling the expenses, ranging from R&Ds and administrative cost expenses as well. So the first quarter, we actually realized OP margin positive. And also, we target that will continue through the second quarter. As for the third quarter and fourth quarter, it’s still not visible to comment yet. So this is our comment on the OpEx. Thank you.

——————————————————————————–

Operator [45]

——————————————————————————–

Due to the limited time, I would now like to hand the call back to IR Director, Tim Kuo, for close remarks.